Predicting the Future

Dec 1, 2023 | Toolbox

Pay attention to your historical profitability statements to help determine what you need in gross profits for 2024.

By Mike Kunkel

As one year ends and another year begins, we are all faced with a choice – doom and gloom or a time for optimism. The past few years have been full of excitement and change. Consolidation has been working throughthe industry – four major players with something close to 75 sites now. Things in the salvage acquisition space have been difficult to navigate. Rising pool fees, title costs, slow loading times have all increased our operational expenses. The quantity of vehicles available, coupled with the number of units that are not actually awarded, has made the prices high while the price of the parts is starting to decline.

Are these things negatives or are they opportunities for us to capitalize? It all depends on your outlook and what you are prepared to do. There are certain things within our industry that do not ever change. It is simple from a conceptual perspective. Buy vehicle, inventory vehicle, dismantle vehicle, sell equivalent parts to equal number of vehicles purchased, collect money, and repeat the process. Sounds very simple, because it is. What gets us into trouble? Failing to understand all the moving pieces and allowing the variables to be too plentiful to control the probable outcome and over-complicating things without getting better results.

Competition for anything makes the price go up. That is free enterprise in its truest definition. The price of vehicles is directly related to demand and availability. We are all in need of salvage vehicles and are expanding our search ranges to help satisfy that demand. We saw our part prices shoot up early in the pandemic and are now seeing those same prices come down while the rest of the world seems to be going up on prices. This is margin compression and is a real thing that will leave a mark if not managed properly.

Regardless of how your outlook is, we have some definitive needs from a financial standpoint. It is not difficult to look over your profit and loss statements from the last few years and see the categories that have seen significant increases. Payroll, insurance, property taxes are a few that come to mind instantly that have moved upward. How much will your operating expenses increase in 2024? That is open to debate but if you have looked at your profitability statements for a two- or three-year period, you will know how much they have increased and that will give you guidance about what to expect from the upcoming year. A line item by line-item look is always a good idea. Is it a controllable expense? Variable or fixed expense? Is it expected to go up or remain the same? Is there room for improvement in a particular category?

Businesses do not just happen to work and make money. They happen to work because they are operated under a plan. 

Once you have looked at the expected expenses of the business for the upcoming year you have a very good idea of how much gross profit you will need to produce in 2024. Why is gross profit important? It is how we pay the bills and have some leftovers as a profit. Businesses do not just happen to work and make money. They happen to work because they are operated under a plan. We have had a nice run the last few years and we tend to lose track of the plan because things just happened easily. Things are changing and focusing on the plan is now essential. Having a reasonably accurate assessment of the expenses is the starting point for any plan.

We are in business to make a profit. There are a lot of cool things about being in business, but they all go away when we are not profitable. Breaking the numbers into bite-size pieces that are easy to understand and simple to execute becomes the basis of the business plan.

Gross profit is the difference between what we paid for the product and what we sold it for. We have gross profit being produced by multiple product lines. In-stock parts, brokered parts, warranty sales, core sales, core deposits, freight, scrap and commodity sales are things that almost all auto recyclers deal with. Aftermarket and re-manufactured products, along with some other things, get mixed in along the way for some people. 

Using your historical performance will give you some indication of what to expect from some of those product lines. If you start off with the gross profit demand of your business and subtract the gross profit produced, you will work your way down to the amount of internal gross profit you must produce. Internal gross profit would come from in-stock part sales along with the scrap disposal component.

Our in-stock sales have two components to it. The first is the sales that we have already purchased. We have often referred to this as the “lake.” It is large in size and carries roughly half of our sales. The other component is the sales from vehicles that we do not own yet. We are constantly adding to our inventory. The fresh arriving material tends to be very desirable and parts of it sell particularly fast. We have referred to that as the “pond.” Even though the number of vehicles and space are substantially different between the “lake” and the “pond” (warehouse and field versus incoming hold section), their sales are relatively close to each other.

Using some simple tools, we can forecast the quantity of vehicles needed, salvage spend, projected sales purchased and ultimately projected gross profit purchased. If done correctly, we will then be able to turn the projected gross profit into actual gross profit, and regardless of the economic times, make sure that our business stays viable. In this case, viable means being able to purchase and pay for enough salvage to then sell enough of each product line to produce the proper amount of gross profit to pay for all of the people and things associated with operating the site. There is no reason to think that profitability needs to disappear even if it gets a little tighter than it was in what would be considered a boom time for most all of us.

Use your experience to predict your future performance and that is how we foresee the future. In a number of realms, this is also called budgeting.

Mike Kunkel is an automotive industry lifer having grown up in his family’s new auto supply, paint body & equipment and machine shop. Following his college graduation, he entered the salvage industry as an installer for Auto Info. His love of the industry led to a successful career in building a large recycling facility in Fort Worth, Texas while being instrumental in the formulation and growth of the TEAM PRP program. Mike is a frequent speaker at industry events in various countries. Mike uses a basic and proven platform to analyze businesses. He provides an honest assessment of where a facility is and what steps need to be taken to grow both sales and profits. Mike is a proven leader who is highly regarded in the automotive industry.

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